Preparing For a Financing Round or an Acquisition
We spend a good portion of our time performing due diligence on companies that are either looking for financing or preparing to be acquired. We thought it would be interesting if we shared some of our observations on what makes the process go smoothly and what causes problems. In our experience and through working with our clients we believe it’s important that you consider the following:
1) Secret Sauce – First off, you need to figure out your secret sauce. Simply stating that you have the world’s largest online bicycle sharing service is only a start. While a service like bicycle sharing might be a great concept, there should also be an algorithm or business method that isn’t necessarily visible to you and I from the outside. For example, the company may have a pricing algorithm that factors in various demand variables for bicycle rentals on a given day and adjust prices accordingly. Look for something similar with your venture. Figuring out your secret sauce will help to raise your valuation.
2) Open Source – We’re a huge fan of open source tools but you need to be diligent about what you are using. Specifically, keep track of the open source products that you use and be aware of the license under which you are using it. There are many different licenses in use today. Below are a few of the most popular and our, non-attorney, interpretations of them. Note, that there is disagreement among much more erudite individuals than us on the terms of each of these so be sure to check with your legal representative before you use any of them.
- GPL – GNU Public License – You are allowed to use, redistribute and change the software, but any changes you make must also be licensed under the GPL. So that means you have to give everyone else the same rights as you got.
- LGPL – Lesser General Public License – If you modify the software, you still have to give back the source code, but you are allowed to link to it (compile with it) without giving the source code to everything you built back.
- BSD license – Berkley Software Distribution – You can take the code and turn it into a proprietary application and you don’t have to give it back.
- Apache license – Allows the use, modification, and distribution of the software for any purpose but does not require modified versions of the software to be distributed using the same license.
3) Patents – One method of demonstrating value and uniqueness is to build up a patent portfolio. To be valid, your patent must be new, useful, non-obvious, and of a subject matter defined as patentable. Machines, processes, methods, and compositions of matter are examples of patentable ideas. Algorithms and laws of nature (e.g. E=mc2) are examples of subject matter than cannot be patented.
Remember your secret sauce? You should not file a patent on this because as soon as you do it becomes publicly disclosed. Instead this is a trade secret which is information that derives independent economic value from not being generally known. A trade secret can be an algorithm that you have developed and resides in your codebase. In our bicycle example, the renting pricing algorithm is a trade secret.
4) Patent Trolls – As soon as you announce an acquisition or any other news that indicates your company is highly valued, someone is likely to file a lawsuit for patent infringement. Facebook was sued five times in the first two months alone after announcing they were going public. Microsoft recently introduced the “Live Tiles” feature as part of Windows 8. They are being sued by a small operating system company for allegedly stealing the patent on “tiles.” Such a lawsuit will tie up resources in your organization and run up legal fees. Make sure you prepare for this inevitable cost of doing business.
Obviously, none of this guarantees success with fund raising or getting acquired but these are items that we often see stop a process or delay it. Make sure you discuss all of this with your advisers, directors, and attorneys.